DEDUCTIONS

Revenue Expenditure – are ordinary recurring expenditures that provide benefits to the current accounting period. They are usually called “period costs” because they are related to a particular period of time of business operation.

They are charged to expense as incurred, and are deductible from gross income if they satisfy the conditions as prescribed by the Tax Code.

Examples:o Salary expenseo Supplies expenseo Repairs and maintenance such as painting, lubricating, cleaning

expenditures; ando Other recurring expenditures that benefit only current operation and do not

improve or extend the life of the asset used in business

CAPITAL EXPENDITURES – are nonrecurring expenditures related to the acquisition of depreciable assets to be used in the business, but not for sale, having a useful life of several years. They provide current and future benefits in business operations.

The cost incurred (or paid) for acquiring such assets is capitalized and not immediately expensed. They are gradually expended from period to period in the form of depreciation or amortization within their estimated useful life.

ITEMS NOT DEDUCTIBE FROM GROSS INCOME

1. Personal, living or family expenses (Sec. 36A NIRC)

2. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate;

3. Any amount expended in restoring property for which an allowance is or has been made;

4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy;

5. Transactions between related taxpayers resulting to losses from sales or exchanges of property, interest expense or bad debts;

6. Bribes, kickbacks and other similar payments (Sec. 34A 1c NIRC). Payment for police protection is illegal.

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7. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services.

CLASSIFICATIONS OF DEDUCTIONS FROM GROSS INCOME

Deductions from gross income are classified as follows:

1. Optional Standard Deduction (OSD);

2. Regular allowable deduction; and

3. Special allowable itemized deduction

OPTIONAL STANDARD DEDUCTION (OSD)

In lieu of allowable itemized deductions, the OSD may be deducted from the gross income as follows:

INDIVIDUAL – other than a non-resident alien, the ODS is 40% of his gross sales or gross receipts.

If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services

CORPORATION – OSD is 40% of its gross income

REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

Itemized Deductions are allowed deductible ordinary and necessary business expenses paid or incurred during the taxable year. As a rule, these deductions require supporting documents to justify the reduction from gross income.

COMPOSITION OF REGULAR ALLOWABLE ITEIZED DEDUCTIONS

1. General Business Expenses;

2. Interest;

3. Taxes;

4. Losses;

5. Bad debts;

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6. Depreciation;

7. Depletion of oil and gas wells and mines;

8. Charitable and other contribution;

9. Research and development;

10. Pension trust; and

11. Premium payments on health and/or hospitalization insurance (for individual taxpayers only)

GENERAL BUSINESS EXPENSES

These expenses are directly attributable to the development, management, operation and.or conduct of the trade, business or exercise of a profession. These include a reasonable allowance for the following:

a. Salaries, wages, management expenses, commissions, and labor;

b. Supplies, and repairs and maintenance, and other incidental expenses;

c. Operating expenses of transportation equipment used in the trade, profession or business;

d. Rental for the use of business property;

e. Advertising and other selling expenses;

f. Travelling expenses while away from home solely in the pursuit of trade, profession or business; and

g. Insurance premiums against fire, storm, theft, accident, or other similar losses in the trade or business.

REQUISITES FOR DEDUCTIBILITY OF GENERAL EXPENSES

1. Ordinary and necessary for the conduct of business or exercise of profession;

2. Substantiated with official receipts or any other adequate records;

3. Reasonable in amount;

4. Withheld with tax paid to the BIR, if required such as salary expense;

5. Not contrary to law, morals, public policy, or public order

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6. Incurred or paid and deducted within the taxable year;

INTEREST EXPENSE

1. There must be an indebtedness stipulated in writing;

2. The indebtedness must be that of the taxpayer in connection with trade, business or profession;

3. The interest must have been paid or accrued during the taxable year; and

4. The interest payment must not be in favor of a relative

TAXES

Requisites:

1. It must be paid or incurred within the taxable year;

2. It must be paid or incurred in connection with the taxpayer’s profession, trade or business; and

3. The tax must be imposed directly upon the taxpayer

The amount of deductible taxes is limited to the basic tax and shall not include the amount of any surcharge or penalty on delinquent taxes.

BAD DEBTS

Requisites:

1. There must be a valid and subsisting claim;

2. The claim must be connected with the profession, trade or business;

3. The claim must not be between related parties enumerated in Section 36B of the Tax Code

4. The claim must actually be ascertained to be worthless and uncollectible as of the end of the taxable year; and

5. The claim must be written off within the taxable year.

NON DEDUCTIBLE BAD DEBTS

1. Not connected with the profession, trade or business;

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2. Arising from unpaid wages, salaries, rents and similar item of taxable income which were not included as income for the year in which the deduction as bad debts is sought to be made, or in previous year; and

3. Contract entered between related taxpayers or members of the family

DEPRECIATION EXPENSE

Requisites:

1. It must be reasonable

2. It must be charged off during the year

3. The asset must be used in profession, trade or business

4. The asset must have a limited useful life

5. The depreciable asset must be located in the Philippines if the taxpayer is a nonresident alien or a foreign corporation

DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONS

1. Initially placed properties. If properties directly related to production of petroleum are initially placed in service in a taxable year, the depreciation method may be either(a) straight-line method, or (b) declining-balance method of depreciation, at the option of the service contractor.

2. Change of depreciation method. If the service contractor initially elects the declining-balance method, it may at subsequent date shift to the straight-line method

3. Estimated useful life

a. The useful life of properties used in or related to properties used in or related to production of petroleum shall be 10 years or such shorter life as may be permitted by the BIR Commissioner

b. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of 5 years

DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS

An allowance for depreciation in respect to all properties used in mining operations, other than petroleum operations, shall be determined as follows:

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1. At the normal rate of depreciation if the expected life is 10 years or less; or

2. Depreciated over any number of years between 5 years and the expected life if the latter is more than 10 years, and

3. The depreciation thereon allowed as deduction from taxable income

DEPLETION EXPENSE

Depletion is the exhaustion of natural resources like mines, oil and gas wells due to production. It is similar to depreciation allowance, the purpose. It is similar to depreciation allowance, the purpose of which is to recover the invested capital in the property.

EXPLORATION and DEVELOPMENT EXPENDITURES

Exploration expenditures means expenses paid/incurred before the development stage of the mine intended to ascertain the existence, location, extent, or quality of any deposit of ore or other mineral.

Development expenditures means expenditures paid or incurred during the development stage of the mine or other natural deposits.

The development stage of the mines or other natural deposit shall begin at the time when deposits or mineral ores are shown in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction.

CHARITABLE and OTHER CONTRIBUTIONS

Requisites:

1. The taxpayer making the charitable contribution must be engaged in a profession, trade or business

2. There must be an actual payment of contribution or gift;

3. The recipient must be an institution specified by law; and

4. The net income of the institution must not inure to the benefit of any individual or private stockholder.

PREMIUM PAYMENTS FOR HEALTH/HOSPITALIZATION INSURANCE (PPHHI)

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The actual premium payments for health and/or hospitalization insurance taken by an individual taxpayer for himself or for his family are allowed as deduction at an amount not exceeding PhP 2,400 per family or PhP 200 a month whichever is lower during the year provided that their family total gross income does not exceed PhP 250,000 for the calendar year.

The total family gross income includes primary income and other income from sources received by all members of the nuclear family, i.e. father, mother, unmarried children living together as one household or single parent with children. A single person living alone is considered as a nuclear family.

The spouse claiming the additional exemptions for qualified dependent children shall be the same spouse to claim the deductions for premium payments.

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